HBzzi 

.FS 



HB 221 
.F5 
Copy 1 



Reprinted from the American Economic Review, September, 1912. 



Will the Present Upward Trend of 
World Prices Continue? 



IRVING FISHER 

[ s, 

Yale University 






La„..M'^<^'\.„ 



D. OF D. 
JAi\l 23 1913 



i4 



t^. 



WILL THE PRESENT UPWARD TREND OF WORLD 
PRICES CONTINUE? 



The whole civilized world is now eager to know whether in the 
future the high cost of living is to advance further, recede, or re- 
main stationary. Opinions are plentiful but data supporting them 
are few. Even the best forecasts I have seen appear to be based 
on a very incomplete comprehension of the problem. Many con- 
ceive it as a problem of ordinary supply and demand and dis- 
cuss the general price level as they would discuss the price of 
wheat or any other commodity, overlooking the fact that the 
causes affecting price levels are as distinct from those affecting 
an individual price as the causes affecting the tides are distinct 
from those affecting an individual wave. 

The problem of the cost of living is primarily a problem of the 
general level of prices, although it is also partly a problem of 
special prices. If the phrase "cost of living" were used to refer 
to the general level of all prices the problem would be purely of 
the former type and not at all of the latter. But this phrase is 
usually taken as referring only to special groups of commodities, 
mostly foods, and only for the retail prices of these commodities. 
The general level of prices, on the other hand, means the level of 
all prices, whether retail, wholesale, jobbing, factory or farm 
prices, and of all commodities, whether of food, raw material, ma- 
chinery, land, stocks, bonds, or any other goods whatsoever which 
are bought and sold. Now, the "cost of living" will go up and 
down with the general level of prices and at the same time fluctuate 
from special causes of its own, just as a buoy in the ocean goes 
up and down not only with the tides but also with the waves. 

The statistics of the past indicate that the recent rise in the 
cost of living has been for the most part due to the general rise in 
prices of all kinds, and only to a small extent, if at all, to special 
causes applying to the retail price of foods. In what follows we 
shall discuss only the causes affecting the general level of prices 



Those who choose to apply the results to the retail prices of food 
and other "living" should take account also of the minor and 
special causes pertaining to these particular prices. 

If I am correct in my philosophy of price levels (as stated in 
my book, The Purchasing Power of Money) the general level of 
prices in the world is determined by the other five magnitudes 
which are joined with it in "the equation of exchange."^ No other 
considerations whatever are relevant — trusts, tariffs, trade unions, 
shorter hours, limitation of output of labor, exhaustion of the 
soil, concentration of population in cities, middlemen, advertising, 
overcapitalization, restrictive legislation, cold storage, pure food 
legislation, sanitary legislation, food adulteration, the "individual 
package," extravagance, world armaments, wars, old-age pensions, 
unemployment, etc. — except so far as these factors affect one or 
more of the five factors in the equation of exchange which alone 
can act on the general level of prices. All the causes above enu- 
merated and many more may, of course, affect the price level by 
affecting these five factors, but not otherwise. 

The proper mode of procedure is therefore to make a forecast 
as to these five factors. Thus far only one of them, the volume 
of money in circulation, has received much attention, and even 
the discussion of this factor has not proceeded along the lines 
proper for a correct forecast. For instance, it is often taken for 
granted that as soon as the gold production begins to subside the 
price level will begin to subside also. This is a gross error. The 
price level does not depend directly on the rate of gold production 
but on the stock of gold and other money. The question is not 
one of an increasing or decreasing annual production of gold. 
The inflowing stream of gold is of significance only as it affects 
the contents of the reservoir into which it flows. A lake does not 
cease rising the instant the freshet filling it reaches its maxiiaum 
flow. The lake will still continue to rise so long as the inflow 
continues greater than the outflow. This is often long after the 
inflow has passed its maximum, 

^ For full explanations see The Purchasing Power of Money and "The 
Equation of Exchange [in the United States] for 1911," in this journal, June, 
1912. The equation is MV -{- M'V = PT in which the letters have the significa- 
tion indicated at the top of the diagram in this article. In brief M is money 
in circulation; V, its velocity; M', deposits subject to check; V, their activity; 
P, the price level; and T, the volume of trade. For reasons given in The 
Purchasing Power of Money, P is to be considered the eifect of M, M', V, V, 
and T. 



The problem, then, is to forecast the future world stock of 
money. But it is more than this. Even if we forecast the world's 
stock of money, we must still take account of the other four price- 
influencing factors in the equation of exchange. In particular we 
must not forget the increasing use of deposit currency by means 
of checks. This factor, which is certain to play an increasingly 
important role in future price movements, has been almost wholly 
neglected in the discussions of this subject. 

The problem of forecasting future price levels is, then, nothing 
more or less than the problem of forecasting the five factors which 
fix price levels, viz., M, M', V, V and T. In the article "The Equa- 
tion of Exchange for 1911 and Forecast" in the June number of 
this Journal, the statistics of these magnitudes for the United 
States were given for the years 1896 to 1911 inclusive. The 
figures for 1896 and 1911 are reproduced. I have added the per- 
centage rates of growth per annum between these dates. 



MAGNITUDES IN THE EQUATION OF EXCHANGE AND THEIR RATES OF 
GROWTH PER ANNUM (fOR THE UNITED STATEs). 





Moneyi 
M 


Depos- 
itsi 

M' 


Veloc- 
ity 2 
(m'n'y) 

V 


Veioc- 

••ty^ 
(de- 
posits) 

V 


Price 

leveF 


Vol- 
ume of 
trade* 

T 


Money 
expen- 
diture' 

MV 


Check 
expen- 
diture' 

M-V 


Total 

expendi- 

ture^ 

MV+M' V 
& PT 


Absolute figures 
for 1896 


0.88 


2.71 


18.8 


36.6 


60.3 


191 


16 


99 


115 


Absolute figures 
for 1911 


1.64 


7.78 


20.9 




49.9 


1022 


413 


34 


388 


422 


Percentage rate 

of growth per 
annum, i89S-i911 


4.2 


7.3 


0.7 


2.0 


3.5 


5.3 


5.20 


9.5 


9.1 



* Measured in billions of dollars. 

' Number of times turned over per year. 

* As a percentage of the price level of 1909. 

* Measured in units each worth $1 in 1909. 

° Measured in billions of dollars. This column includes not only "total ex- 
penditures" (MV -\- M'V) but also its equal, "total value of goods purchased" 
(PT). 

We see that the deposits subject to check have increased with 
great rapidity (7.3 per cent per annum) and that the use of these 
deposits by checks increased still more rapidly (9.5 per cent). 
Both far outstripped trade which increased at 5.3 per cent, al- 
though trade outstripped money which increased at 4.2 per cent. 



In the above mentioned article it was emphasized that we could 
not fully understand the causes influencing the price level of the 
United States without considering the conditions in other nations. 
Problems of money and prices are peculiarly international in their 
nature and no trustworthy forecast can be made without taking 
account of world conditions. 

Unfortunately, as yet we have no data approaching in complete- 
ness those for the United States, by which we can estimate even 
by very rough approximations the six magnitudes {M, M\ V, V\ 
P, T) for the world as a whole. By "the world" is here meant the 
gold standard world.^ Rough estimates (about 11 or 12 billions) 
have been made for the total money in the (gold standard) world, 
and a rougher estimate (about 15 billions) could be made for 
deposits subject to check. As to the other magnitudes in the 
equation, however, we have no clue except the calculations above 
given for the United States. 

But, instead of attempting to estimate the absolute values of 
the six magnitudes in the equation of exchange, we may estimate 
approximately the percentage rates at which these magnitudes are 
increasing. Even this estimate will necessarily be rough, but 
there are so many fragmentary indications or straws which show 
which way the wind is blowing that the results have, I believe, some 
value. If the present plan for an International Conference on 
the Cost of Living should be adopted, one of the most important 
results would presumably be a completer investigation than is now 
possible and, in consequence, an exacter estimate of these rates of 
increase. Possibly it is not too much to hope that we might then 
be able to ascertain even the absolute values of the magnitudes in 
the equation of exchange for certain leading nations. 

The following^ statistics show the estimated percentage rates 

' This now includes practically the whole money-using and bank-using world 

except China. 
* This table and the other tables which follow in this article are based on 

data between 1896 and 1911 as available. The data were derived as follows: 

M. The rates of increase of the quantity of money in circulation are calculated 
as the rates of increase of the total quantities of money in the various coun- 
tries (including bank reserves and government accumulations). They are 
taken from the Comptroller's Reports for 1897, 1904, and 1911. Forty-six 
countries are included. 

M'. The rates are calculated from "individual deposits" in the United States 
and corresponding foreign deposits, so far as fragmentary data permit. The 
data are from the United States Comptroller's Reports, Conrad's Hand- 



o/ increase in recent years of the six magnitudes in the equation of 
exchange for the four foreign countries of chief interest to the 
United States, together with certain derivative magnitudes. As 
the figures can be only rough estimates, they are not given nearer 
than to the nearest half of one per cent. 



Country 


Recent Percentage Rates of Growth per annum of : 


0) 

o 


to 
'to 

a 




1 = 
> 
V 


O J 

V z 
o - 

< 

V 



P 


2^ 

> o 

T 


II 


Oft 
Jf'F' 


01 pi 

MV+M' V 


PT 


Canada 


9 


]'2 


V2 


-1 


2 


7 


9% 


11 


H 


9 


Great Britain 


'A 


3% 





V2 


1/2 


3+ 


% 


5 


4V2 


4J^ 


Germany 


2% 


]3 





-6% 


2y. 


6 


2>4 


oVz 


5 


b^ 


France 


1 


7 





4 


2 


3 


1 


11 


5-8 


5 



The chief errors or discrepancies in this table are doubtless those 
in the rates found for V\ The reason is that these rates are de- 
rived indirectly, by subtracting the rate of increase of M\ from the 

worterbuch der Staatswissenschaften, Mulhall's New Dictionary of Sta- 
tistics (edited by Webb), and The Encyclopedia Brittanica. Deposits in- 
clude more or less complete statistics for the United States, Canada, Great 
Britain, Australia, Germany, France, Austro-Hungarian Bank, Holland, 
Denmark, Norway, Mexico, Sweden, Switzerland, Russia, Japan, India. 

V. Rates here are guesses based on the fact that the previous calculations for 
the United States show a rate of increase of 0.7 per cent. It is assumed 
that this rate — slightly over i/g P^^" ^^^^ — applies to Canada and, to be 
conservative, that in all other countries it is negligible. Later we shall 
give reasons for believing that the velocity of circulation is really increasing 
although we have no means of knowing at what rate. 

M'V. The percentage rate of increase of M'V (the total check expenditure) 
is assumed to be equal to the percentage rate of increase of bank clearings. 
The statistics of bank clearings are taken from the same sources as those 
of deposits. The clearings used for "France" are only those for Paris. 
Statistics of clearings for "English Speaking" nations include the United 
States, Canada, England (I ondon and four other principal towns), and 
Australia (Sydney, 7 per cent and Melbourne, 5 per cent). The statistics 
of clearings for "Continental Europe and Japan" include the clearings for 
Italy (11 per cent) and Austria (15 per cent, comprising Briinner, Prague, 
Budapest and Vienna). 

v. This is calculated as the excess of the percentage increase in M'V over 
that in M'. 



/ate of increase of M'V; when opposite errors occur in these two 
magnitudes (M' and M'V) the consequence is a cumulative error 
in V which may become either too large or too small. The re- 
sults, therefore, for F" are believed to have practically no value. 
Most of the other figures are probably approximately correct. We 
see that the money in circulation is increasing with great rapidity 
in Canada (9 per cent per annum) and only slightly in 
the other countries in the table, that deposits subject to check 
are increasing with greatest rapidity in Canada and Germany 
and least in Great Britain, that the volume of trade is increasing 
twice as fast in Canada and Germany as in Great Britain and 
France, and that the price level is increasing about 2 per cent per 
annum in all countries. 

MV -\-M'V'. The method of averaging the rates of increase of MV and 
M'V so as to get the rate of increase of MV -\-M'V' has been to weight 
them by using the estimated relative volumes of deposits and of money in 
circulation, and remembering that the deposits (judging from the United 
States) have at least twice the velocity of circulation of the money. 

P. Price statistics include not only those separately given in the tables but 
also Belgium (li/o per cent), Italy (li/g per cent), India (21/2 per cent), 
Holland (li/g per cent). The sources of the statistics of prices are the 
United States Bulletin of the Bureau of Labor, Wholesale Prices in Canada, 
Journal of the Royal Statistical Society, Bulletin de la Statistique Oen6rale 
de la France, and La Curva dei Prezzi Delle Merci in Italia, Negli Anni 
1881-1909. 

T. The estimate for the rate of increase in the volume of trade is of course 
a very rough one, although it has involved more labor than those for all the 
other five magnitudes put together. It is found by averaging the rates of 
increase in railroad tons carried, railroad gross receipts, post ofiBce letters 
carried, post office gross receipts, imports and exports (corrected for rate 
of change in price level, simply by deducting 2 per cent, so as to refer to 
quantities rather than values), and shipping tonnage (entered and cleared 
with cargoes). These figures are based on data from the sources above 
mentioned. The statistics for the number of letters are for the following 
countries only: United States (7V2 per cent). Great Britain (3 per cent), 
Germany (6 per cent), France (214 per cent), Austria (ii/^ per cent) and 
Hungary (41/3 per cent). The statistics for exports and imports include 
those for the United States (3 per cent), Canada (5 per cent), Great 
Britain (3 per cent), Germany (6 per cent), France (5 per cent), Austria- 
Hungary (9 per cent), Italy (4% per cent), Russia (y, per cent), Holland 
(21/2 per cent), Belgium (31/, per cent), Japan {QY> per cent). The ship- 
ping tonnage of "other" countries in the next following table includes only 
Australia, British India and Uruguay. In the case of shipping tonnagfc 
under the head of "Continental Europe and Japan" the figures for Japaa 
are lacking. 



It will be seen that the figures roughly check each other but 
that there are some discrepancies. The percentage rates of growth 
of the two sides of the equation of exchange ought to be exactly 
equal. This is true of Great Britain where both MV -\- M'V and 
FT are found to be increasing at the rate of 4^ per cent per 
annum. For Canada MV -|- M'V is found to be increasing at 
the rate of 11 per cent and PT, only 9 per cent. For Germany 
the rates disagree more, being 5 per cent and 8I/2 per cent. For 
France the rate of increase of MF -j" M'V cannot be definitely 
determined. It is an average of 1 per cent for MV and 11 per 
cent for M'V and therefore lies between 1 per cent and 11 per 
cent, but we have no exact knowledge of the relative importance of 
MV and M'V. 

The table shows that deposits are increasing far more rapidly 
than money. This fact is of great significance, especially in ref- 
erence to the future trend of prices. 

The volume of trade is increasing at rates less in all cases than 
deposits. This is true of the four particular countries in the pre- 
ceding table, as well as in the United States cited in the former 
table, and in the various parts of the world given in the table 
which follows. In all eight instances (United States, Canada, 
Great Britain, Germany, France, "English Speaking," "Conti- 
nental Europe and Japan" and "Other Countries") trade (T) 
is growing more slowly — usually much more slowly — than the 
use of checks {M'V). In all cases except Canada it (T) is 
growing faster than money (M) or than the circulation of money 
(M V) ; but in all cases it is growing more slowly than the total 
use of circulating media {MV -\- M'V).^ 

In the following table^ the whole gold-standard world is in- 
cluded, grouped into three great divisions selected because of dif- 
ferences in the relative use of checks and money. The first group, 
including "English speaking countries" (United States, Canada, 
Great Britain and Australia), makes a very extensive use of 

*This is true unless we except the uncorrected figures for Germany, "Con- 
tinental Europe and Japan" and "Other Countries" for all of which categories 
the figures fail to check each other up. When these figures are corrected to 
become mutually consistent, the rates of increase of T are found to be less 
than of MV -^ M'V precisely as in the other cases. For the world as a 
whole the volume of trade has certainly increased less rapidly than the use of 
circulating media. 

■* The method of constructing this table is explained in the preceding footnote. 



8 



checks. The second, comprising "Continental Europe and Japan," 
has begun the use of checks, but is still far behind English speak- 
ing countries, while the third, "Other Countries" (principally 
India) makes as yet almost no use of checks. The first three 
columns, showing the money in the countries and the bank de- 
posits, bring out the contrast at a glance. 











Recent Percentage Rates of Growth, per annum of : 










«M 


^_^ 


«M 














^1 






o 


h 




1 


O 




Kg 


si 


lif 


Countries 


s 
o o 




.2 a 
pH-d 


o 


P 


!> 




p 


5^ 
> 


It 


^-2 
5| 


p< 


S|| 








M 


M 


M' 


V 


V 


P 


T 


ilfF 


3/' V 


J/F+M ' V 


py 


English 


4.8 


2fi.O 


5.4 


3.5 


8 


V. 





2^ 


5 


4 


8 


1% 


7% 


Speaking 




























Continent- 




























al Europe 


6.2 


2.9 


.5 


2 


8 


u 


1 


2 


6 


2 


9 


4-6 


8 


and Japan 




























Other 
countries 


1.7 


.3 


.2 


V2 


9J^ 








2 


8 


>^ 


9J^3 


1-3 


10 


All gold 
standard 


14.7 


39.2 


2.0 


2V, 


8 


% 





3 


5^ 


3 


8 


7 


7% 


countries 





























' In billions of dollars, 
'Incomplete; in billions of dollars. 

* In the absence of data for clearings, the rate of growth of M'V is taken 
as equal to the percentage growth of deposits. 

It will be noticed that the figures for "All gold standard 
countries" mutually verify each other, that is, the relative rate of 
increase of the left side of the equation (7 per cent) is approxi- 
mately equal to the rate of increase on the right side (7^ per 
cent). In the case of English speaking countries the agreement 
between the two sides of the equation is perfect, each showing a 
rate of increase of 7^ per cent. In the other two items in the 
table, however, there is a wide discrepancy between the two sides 
of the table. The results (for "Continental Europe and Japan") 
would seem to show a rate of increase in the left side of the 
equation of from 4 per cent to 6 per cent per annum and in the 
right side of 8 per cent. The discrepancy of "Other Countries" is 
still greater, the left side showing an increase of only from 1 per 
cent to 3 per cent per annum, while the right side shows an in- 
crease of 10 per cent. I have no doubt that these discrepancies' 
are due almost entirely to errors in T. As explained in the foot- 
note to the first table, the rates of increase of T are taken as an 



average of the rates of increase of railroad tons carried, railroad 
gross receipts, post-office gross receipts, imports and exports 
(quantites) and shipping tonnage. These items naturally show 
a great rate of increase in countries where the railway, the post 
office and the steamship have not been in use long enough to have 
approached as yet their full development. Like most young or- 
ganisms they grow especially fast and consequently are not good 
indications of T. The growth of the railroads is not a good indi- 
cation of the volume of trade for countries like India, though it 
may be a fairly good index for the volume of trade for the United 
States, Great Britain and Europe. In countries where these in- 
ventions are now being introduced the rate of growth represents 
chiefly the development of these particular inventions, and not 
simply the growth of business in general, while in the countries 
where the railroad, post office and steamship have already reached 
nearly their full development or maturity, their growth depends 
chiefly on the growth of business in general. In view of this con- 
sideration, the fact that the figures for the rates of growth of 
the volume of trade (T) are greater in "Continental Europe and 
Japan" than in "English Speaking Countries" and are still greater 
for "Other Countries" casts no discredit on the other figures of 
the table. 

The figures for the United States which are included in the last 
table were worked out by the same rough method as for the other 
countries. The results in general agree fairly well with those 
obtained by the more exact method employed in the June article 
and summarized in the beginning of this article. This agreement 
increases our confidence in the other figures in the table. ^ The 
agreement is especially satisfactory for the chief magnitudes MV, 
M'V\ and FT. 

" The full comparison of the figures for the United States calculated by 
the "rough" and "exact" methods is as follows in percentages: 





M 


M' 


V 


V 


P 


T 


MV 


M'V 


MV+M'V 


PT 


M' 
M' 


Rough 


iVz 


10 


'A 


-2 


2% 


6^ 


5 


8 


7% 


9 


5 


Exact 


4.2 


7.3 


0.7 


2.0 


3.5 


5.3 


5.0 


9.5 


9.1 


9.1 


2.8 



The worst discrepancy is in V the rate for which by the rough method shows a 
negative result. The latter is clearly an error and is probably due, in ac- 
cordance with previous explanations, to the cumulative effect of two errors, 
one in the "rough" rate for M'V (8 per cent) which is too small, and the 
other in the "rough" rate (10 per cent) for M', which is too large. 



lO 



If, now, the "exact" figures for the United States be substituted 
for the "rough" figures, the results for "English Speaking" and 
for "All gold standard countries" will become slightly changed. 
The changes which will thus be produced in the figures for "All 
gold standard countries" will be seen in the second line of the fol- 
lowing table. The first line repeats the original calculations given 
above, while the third line gives the final estimates obtained b}' 
making arbitrary mutual adjustment."^ No figure for any of the 
primary magnitudes, M, M\ V, V , P, T, has been altered 
by more than one half per cent. 



THREE APPROXIMATIONS FOR PERCENTAGES, 

COUNTRIES." 



ALT. GOLD STANDARD 





M 


M' 


V 


v 


P 


T 


MV 


M'V' 


M V 

+ 
M' V 


PT 


M' 


Original 
calculation 


2J^ 


8 


% 





2 


5J4 


8 


8 


7 


ty^ 


1% 


Revised by 
"United States 
exact" 


2>^ 


7 


% 


2 


2>4 


5 


3 


9 


8 


7^ 


4% 


Finally adjusted 


2}^ 


6% 


% 


1% 


2% 


4K 


3 


8 


7 


7 


4 



The last line contains the final conclusions as to the growth of 
those world conditions directly affecting the price level. We see 
that world prices have been rising about 2^ per cent per annum ; 
and that this is due to the fact that the total circulation of money 
and checks {MV -\- M'V) grew Sl^ per cent faster than the 

' In making these adjustments I have exercised my own discretion and 
taken account of other considerations besides merely making both sides agree. 
In particular, I have adjusted T downward because, as already indicated, the 
T rates are in general exaggerated. 

In the United States the volume of trade (T) is increasing at the rate of 
5.3 per cent per annum; and since our population is increasing at the rate 
of li/o per cent per annum, the increase per capita is only about 4 per cent. 
It does not seem likely that the increase per capita in many other lands would 
be greater than in the United States, while the increase in population is less, 
being only 1 per cent. On this basis we would conclude that the rate for the 
world would not be over 5 per cent and may be considerably less. The T rates 
as first worked out averaged 5i/^ per cent. But these included a rate for the 
United States, reached by the rough method employed for other countries. 
This roughly calculated rate for the United States was 61/2 per cent, whereas 
the true rate, according to the far more trustworthy data previously em- 
ployed was 5.3 per cent. Using this more exact figure in place of 61/2 per cent, 
we found the average rate for the world to be 5 per cent in place of Syg 



II 

volume of trade (T), the growth of circulating media being 7 per 
cent per annum and the growth of trade being only 4% per cent 
per annum. The 7 per cent growth of circulating media was, in 
turn, due principally to the growth in check circulation (M'F^) 
which advanced 8 per cent per annum. This 8 per cent growth in 
check circulation was, in turn, due chiefly to the growth of depos- 
its (i¥) which advanced 6y2 per cent. Of this 6^/^ per cent 
growth of deposits, in turn 2% per cent was due to the increase 
of money (M) and the balance, 4 per cent, to the outstripping of 
money by deposits, i.e., to the growth of relative deposits jp 

Forecast for the Gold Standard World 

As previously stated and elsewhere emphasized,^ M', the volume 
of deposits subject to check, tends to keep pace with M, the quan- 
tity of money in circulation. It follows that a part of the in- 
crease in M' is due to the increase in M. Consequently also a part 
of th'e increase in M^ V is due to the increase in M. It is well to 
bear this in mind, for the principal importance of the increase in 
gold production lies in its effect on M' . The mere increase in M 
alone would be relatively unimportant. If M, instead of increas- 
ing 214 per cent, had not increased at all, M' would not have in- 
creased 6I/2 per cent but only 4 per cent. In that case there 
would have been no increase in the price level. So also, if in the 
future M should suddenly cease increasing whiL^ M' relatively to 

per cent. But even this does not sufficiently allow for the exaggeration in 
our index of T, since that exaggeration probably applies to all other countries, 
unless possibly England and France, where the post office and railway busi- 
ness has not been greatly extended except in specific response to the general 
growth of business. In both these countries the T rate is calculated at 

3 per cent. But in all other countries the results are doubtless exagger- 
ations. We have already presented internal evidence of this in the great 
discrepancy between the estimates in the two sides of the equations, in 
"Continental Europe and Japan" and in "Other Countries." In the former 
the excess of the side of the equation on which T is found is 2 per cent to 

4 per cent, while in the latter it is from 7 per cent to 9 per cent. In the 
United States the excess was li/o per cent. Taking all these considerations into 
account, I feel safe, when making the final adjustments, in trimming down 
the T rate from 5 to 41/3 per cent. It is believed that the final estimate is in 
general correct within less than one point (one per cent of growth). This is 
not a high degree of accuracy but it represents, I believe, a better basis for 
forecasting the future than any which has hitherto been employed. 

* See The Purchasing Power of Money, chs. 3, 8. 



12 

M should continue the same rate of increase and T also should 
increase at the same rate, the price level would remain stationary. 

For reasons to be given I believe it is fairly safe to say: (1) 
that M^ will, for many 3^ears, increase as fast relatively to M as 
it has in the past, (2) that M, V, and F' will increase at least to 
some extent (even if only as fast as population) and (3) that T 
will not increase faster than at present. If these conclusions are 
correct it follows that the price level must rise in the future. 

We shall examine the prospects in detail for each of the magni- 
tudes M, M\ V, V, and T. 

M. The principal cause in recent years for the increase of 
money in circulation has been the great output of gold. This out- 
put has been a remarkably steady percentage (4*1/2) of the world's 
stock of gold.^ Analogy would lead us to expect a continuance of 
this rate in the future. But analogy is an unsafe guide. Some 
gold mining experts like de Launay add their testimony in favor of 
continuation. Others, like Mr. George E. Roberts, Director of 
the United States Mint, think the chances are that the maximum 
will be reached in a few years. There are always, of course, chances 
of new discoveries or methods of production and chances of ex- 
haustion of mines, although the exhaustion of mines is readily fore- 
seen several years in advance, while the discovery of new mines or 
methods can never be definitely foreseen. Leaving out of account 
the chance of great discoveries which always exists, the output is 
fairly sure to remain great even if it ceases to increase or to In- 
crease at the present rate. 

There is, of course, a tendency for the increased gold produc- 
tion automatically to check itself, since the increase in wages and 
other expenses which are caused by the increased quantity of 
money, makes the working of the mines themselves more expensive. 
Director Roberts, who is one of the best informed men in the 
world on this subject, in his 1911 report, states: 

"It has been a theory of writers on the subject that the rise of 
commodities and wages would automatically check the production of 
gold, thus providing its own corrective, but the gold-mining industry 
furnishes an illustration of how invention, organization, and the use 
of capital are able to accomplish a reduction in costs when every 
factor in the calculation shows an advancing tendency. The cost of 
handling ore and extracting gold in the Transvaal mines per ton of 
ore treated has steadily declined and made a new low record in 1910." 
"While it is not likely that the Rand will show an appreciable 

* Moody's Magazine, March, 1912. 



13 

decrease for a good many years to come^ it is probably not far from 
the maximum output. There has been no gain in the world's produc- 
tion for some years except that made by the Rand."^° 

We conclude then that, so far as the future production of gold 
is concerned, it is not safe to predict any great future increase 
although it would be still less safe^^ to predict a decrease. It 
seems safe only to say that the production of gold will not decrease 
fast nor suddenly and that whether or not its production decreases 
at all, gold will for many years still be produced in sufficient quan- 
tities to create a net addition to the world's money and bank re- 
serves of, let us say, at least 2 per cent per annum, or one ha.lf 
per cent less than the present rate. It seems unlikely that the 
rate of increase of money stock will fall much below this. 

The fact that the gold standard world is now so large tends of 
course to lessen the effect of fresh supplies of money, but these 
supplies are also large while bank deposits are becoming a more 
and more dominant feature. There was a time when the Orient 
acted as a "sink" of the precious metals and to some extent it 
does so still. India has been yoked to the gold standard since 
1893-1898 and this fact has doubtless mitigated the rise of prices 
which the world has experienced since 1896. What Professor J. 
Stanley Jevons said of India, when gold and silver countries were 
united through bimetallism, holds true today when India is linked 
to gold standard countries through the "gold exchange standard." 
He said: 

"Asia, then, is the great reservoir and sink of the precious metals. 
It has saved us from a commercial revolution and taken off our hands 
many millions of bullion which would be worse than useless here. 
And from the earliest historical ages it has stood in a similar relation 
to Europe. In the Middle Ages it relieved Europe of the excess of 
Spanish-American treasure, just as it now relieves it of the excess of 
Australian treasure. "^^ 

According to the Director of the Mint, for the eleven years 
1900-1910, India absorbed 434 millions of gold and, for the Brit- 
ish fiscal year ending March 31, 1911, the net imports were 90 
million dollars, or about one quarter of the world product after 
the industrial consumption was provided for. A correspondent 
of the Director of the Mint writes : 

'^'' Report of the Director of the Mint for 1911, p. 67. 

" How hazardous it is to set a limit to gold discovery is well illustrated by 
the prediction of the Austrian geologist, Suess, fifteen years ago, that gold 
production had reached its climax and would decline ! 

^Investigations in Currency and Finance (London, 1884), p. 137. 



14 

"The net import of gold into India for the month of February, 1912, 
is a fresh record and amounts to the substantial sum of ,£5,174,600. 
This total is more than double that for February, 1911, and repre- 
sents nearly one-sixth of the whole Rand output for 1911. The bulk 
of this large sum was imported in the form of sovereigns which were 
available for circulation if the country so desired." 

Yet India has not prevented the world rise of prices and she has 
herself shared this rise, at the rate of about 2^ per cent per an- 
num, as the statistics of Atkinson show. Even if China should 
follow the example of India and introduce the gold exchange 
standard, the effect in steadying prices would probably not be 
great; for China, like India, though large in population, is small 
in its use of money per capita. Excepting China there now re- 
mains no important country which can relieve the present gold 
standard world of redundant gold. Nor is gold the only source of 
addition to monetary stock. If the plan of the National Mone- 
tary Commission should be adopted or, for that matter, any other 
plan likely to be considered for improving our currency, the re- 
sult must inevitably be to inflate the currency. It would also get 
rid of our present uneconomical use of bank reserves and substi- 
tute a system which would virtually release reserves now locked 
up. The tendency of all these changes (however desirable on other 
grounds) would be to raise prices. When, therefore, we consider 
all the possibilities — the chances of new discoveries of gold or of 
further economies in gold mining, the certainty of a continuance 
of an enormous annual extraction of ore actually "in sight," the 
chances of increases in paper money and subsidiary coins — we 
may well feel confident that gold production will not slacken 
enough to bring the upward movement of prices to a standstill. 
In order to arrest this upward movement of prices, the gold pro- 
duction would practically need to cease altogether so as to make 
the money in circulation (ilf) remain stationary; for the figures 
given show that M is now increasing at the rate of 21^ per cent 
which is the same rate as P is increasing. 

V. Next let us consider the prospects for the velocity of cir- 
culation of money. We have assumed that the velocity of circu- 
lation of money in the world will only feebly increase, this assump- 
tion being based on the calculation made above for the United 
States. It is safe to say that the rate of increase could not be 
much lower than that assigned and it may be somewhat higher. In 
fact there is much to be said in favor of the latter view. The 
extension of rapid transportation will tend powerfully in this di- 



15 

rection especially in slow and backward countries like India. 
Again the extension of banking tends in the same direction. Where 
banking does not exist, money is hoarded, i.e., circulates slowly. 
Where banking is introduced, money is deposited and finds its way 
into circulation. No one will, I think, deny that, for many reas- 
ons, hoarding is constantly on the decrease, and a decrease in 
hoarding means an increase in velocity of circulation. It was not 
long ago when French people stowed away large sums of money 
in stockings and other domestic receptacles. These were their 
chief savings banks, and savings meant hoards. But today all 
money not needed for immediate use is generally deposited in some 
sort of bank, whether a savings bank or an ordinary bank of 
deposit, and is thence returned by that bank into circulation or 
used as a reserve for several times its value in deposits subject to 
check. In either case the eifect is virtually to inflate the currency. 

We may, I believe, expect such a release of oriental hoards in 
the future. The astonishing lengths to which hoarding is now 
carried in Egypt and India are emphasized by Director Roberts 
of the United States Mint. He says: 

"The Egyptian situation is somewhat like that of India. The 
country is on a gold basis, and for 30 years has been steadily taking 
gold in the settlement of its trade balances. The high price of cotton 
in recent years and the increasing production of the country explains 
the trade balances, but there is some mystery about the way the 
gold disappears from view. It does not enter into bank stocks, and 
it is difficult to understand how a country of its size and population 
and in which the masses of the people are so poor can absorb so much 
gold coin. . . . Some light is shed upon the situation by the follow- 
ing statement in an address by Lord Cromer, made in London in 1907: 

'A little while ago I heard of an Egyptian gentleman who died 
leaving a fortune of .£80,000, the whole of which was in gold coin in 
his cellars. Then, again, I heard of a substantial yeoman who bought 
a property for ,£25,000. Half an hour after the contract was signed 
he appeared with a train of donkeys bearing on their backs the 
money, which had been buried in his garden. I hear that on the 
occasion of a fire in a provincial town no less than £5,000 was found 
hidden in earthen pots. I could multiply instances of this sort. 
There can be no doubt that the practice of hoarding is carried on to 
an excessive degree.' " (The Statist, Nov. 2.) 

The amount of such hoards has been emphasized by Director 
Roberts of the United States Mint as evidence that they provide 
a future sink for gold and thus tend to absorb gold, and perhaps 
arrest the rise of prices. There can be no doubt that oriental 
hoarding will continue for years to afford an outlet for redundant 



i6 

gold, and so tend to mitigate the resultant rise in prices. But 
there is no reason to think that such a cause can stop the rise. 
The weakness of such an argument lies in the tacit assumption that 
the influence of hoarding will be more powerful in the future than 
in the past, whereas the opposite is likely to be the case; and in 
the past it has not been sufficient to prevent a rapid rise of prices. 
In the future we must reckon with a lessening tendency to hoard 
and an increasing tendency to gradually unload ancient hoards. 
Just as, with the introduction of banking, hoarding long ago 
went out of vogue in England, and more recently in France, so it 
must surely, if slowly, go out of vogue in India and Egypt. The 
transformation will take place as these countries gradually intro- 
duce occidental banking. Already there is a rapid growth of 
banking in these countries. Thus in Egypt postal savings bank 
deposits increased from $190,000 in 1901 to $2,250,000 in 1910, 
and in British India, from $35,000,000 in 1899 to $51,000,000 in 
1910.^^ Similarly the Statistical Abstract, relating to British 
India (p. 97) shows that deposits in twenty-one banks have more 
than doubled in nine years, reaching $180,000,000 in 1909. 

The same principle applies to oriental hoards in the form of 
ornaments. Centuries ago Englishmen used to put part of their 
hoards into "plate" which could be reconverted into coin if 
emergency required. With the advent of banking devices such a 
custom has long since disappeared. It is to be expected that little 
by little the same process will turn part of the oriental hoards of 
ornaments into monetary use. Thus, as a consequence of the 
introduction of western civilization into the Orient, we have the 
prospect of further additions to the effective use of the world's 
gold, a further virtual inflation of the currency. 

Director Roberts says :^* 

"There is an undoubted tendency in all countries to use banks more 
than formerly, and it is probable that the stock of gold in banks has 
been recruited not only from new production but to some extent from 
gold heretofore held in private hoards and out of use. In every 
country the younger generation to whom these hoards descend is 
likely to put them to some use." 

Similarly government hoards and even bank hoards seem likely 
in the future to decline or at any rate to cease being accumulated. 
A decade and more ago gold w^as so scarce as compared with the 

" United States Comptroller's Report, for 1911. 
"Ibid., p. 61. 



17 

demands made upon it that a large part of the early additions to 
the world's stock were absorbed to strengthen weak reserves and 
government hoards and to replace silver and paper. About a 
billion of gold has been accumulated by the United States in the 
last ten years and about half a billion by Russia and France. 
Moreover, Japan, Argentina, Brazil and Mexico have absorbed 
much gold. India, Mexico, the Philippines, Panama and the 
Straits Settlements have made demands on gold to sustain their 
"gold exchange standard." An economist of note writes : 

"The effect in raising prices I think, however, would have been vastly 
greater than it has been had not the United States, Russia and Egypt 
been hoarding gold and thus employing it uneconomically." 

These demands on gold have now been so far satisfied that in 
the future any addition to the world's stock will be freer to act on 
prices both as a circulating medium and as bank reserves. This 
means that what may be called the "virtual velocity of circulation" 
of money will be increased. 

M\ We come next to the volume of deposits subject to check 
(ilf') and their velocity of circulation or "activity" {V). 
These together constitute the use of checks (If F''). Perhaps no 
factor has been so greatly neglected or underestimated in import- 
ance as the use of checks. When once it is recognized that de- 
posits subject to check are a form of currency similar in function 
to bank notes, — nay, are today the chief form, the discussion of 
the price level will assume a new phase. 

As was shown in my June article, in the United States the vol- 
ume of check transactions forms 92 per cent of all transactions. 
Probably something like this ratio obtains in Canada and England. 
Outside of English speaking lands, however, the ratio is undoubt- 
edly much less. If we could assume that the volume of check 
transactions actually maintained a constant ratio to that of money 
transactions, the circulation of checks would not then have to be 
reckoned with as an independent factor. Some day in the future, 
when the use of checks has grown up to its work, it would not be 
strange if the ratio of checks to money should remain fairly con- 
stant. At present, however, we are passing through a long transi- 
tion period during which the device of using checks instead of 
money is being extended with prodigious rapidity. This is the 
dominant feature of the present situation and forms the chief basis 
of the forecast here attempted. All nations — even those which 
have used checks for generations — are making a continually larger 



i8 

use of checks relatively to money. As the last table shows, the 
use of banking devices is increasing much more rapidly than the 
volume of money. The volume of deposits is increasing at the 
rate of 6V2 P^^ cent per annum. Even in England where checks 
have been used for so long a time, the volume of deposits is still 
increasing at the rate of S^/^ per cent per annum; in the United 
States, at 7.3 per cent ; in Canada, at 12 per cent ; and in Aus- 
tralia, at 3I/2 P^i' cent. These are English speaking lands, in 
which, if anywhere, the use of checks should have approached its 
limit. No such approach is observable in the United States or 
Canada and the data for Australia are too meager to be con- 
sidered representative. 

In "Continental Europe and Japan" there is certainly no ten- 
dency to decrease. Here in the next few decades is a vast region 
for the extension of deposit banking. It would not be surprising 
if, in Germany and other continental countries, the use of checks 
should reach a stage when every business man would begin to 
realize that he must employ them. Then the use of checks would 
increase at an even more rapid rate than at present. At present 
the rate of increase in France is 7 per cent, in Germany 13 per 
cent, Holland 9 per cent, Denmark 10 per cent, Norway 8 per » 
cent, Sweden 5^/^ per cent, Switzerland 5 per cent, Russia 21/^ 
per cent, Japan 10 per cent, the Austro-Hungarian Bank 17 per 
cent. In backward India where deposit banking has only just 
begun, the rate of increase is 9 per cent, in Mexico 11 per cent. 
Should only the present rate of increase be maintained, while the 
rates in English speaking lands should slacken, the average rate 
for the world would not necessarily or even probably decline. At 
present the deposit currency of the United States far exceeds that 
of other countries, but the deposit currency of Continental Europe 
and Japan will cut more and more of a figure, and by the time — 
perhaps a generation hence — when their rate of increase begins to 
slacken, India and other of the (now) backward countries in the 
third group of the last table will then need to be reckoned with. 
The present relative positions of these three groups are shown 
roughly by the ratio of deposits to money in the country as given 
in the last table but one. In the English speaking group de- 
posits are almost five times the money in the country. In the 
next group — Continental Europe and Japan — on the other hand, 
the figures show that deposits are only half as great as the money, 
although this ratio may be too small if, as is likely, the statistics 



19 

of deposits are more defective than those of money. The third 
group shows money to be only one fifth of the deposits although 
there is the same probability that this ratio is too small also. 
Unfortunately neither the figures for money nor the figures for 
deposits which were used in forming these ratios, exactly repre- 
sent the M and ilf of our table. The money in the country in- 
cludes money in banks and government vaults, while the deposits 
include many deposits which are not subject to check. Yet in a 
general way we may believe that the relative importance of money 
in circulation and deposits subject to check is approximately rep- 
resented in the table. ^^ At any rate the obvious lesson of the 
figures is a prodigiously rapid expansion of deposit-banking 
throughout the world. 

V\ We come next to the activity of deposits subject to check. 
In the United States this has shown a progressive tendency to in- 
crease. As the factors — concentration of population in cities, 
rapid transportation, etc. — which tend to increase F' are con- 
stantly increasing, we may expect this factor to increase for other 
countries also. That concentration of population in cities is a 
very powerful influence in accelerating the activity of bank ac- 
counts is shown clearly by the figures of Pierre des Essars and 
myself. The activity of deposits varies almost exactly with the 
size of the cities and the range of variation is surprisingly great. 
This exceeds 100 times a year in Paris, Berlin and Brussels, but 
is only 16 times a year in New Haven, four times a year in Athens, 
Greece, and only once a year in Santa Barbara, California. -^^ 

These results accord with the fact that the velocity of circula- 
tion in the United States has increased very substantially during 
the last fifteen years — from 37 times a year to 50 times a year. 

Finally, we have the testimony of the statistics of clearing- 
houses. The rate at which these increase is used as a rough indi- 
cation of the rate at which the use of checks (M'V) increases. 
As the figures in our tables show, clearings usually show a more 
rapid rate of increase than deposits. This indicates that the use 

" In the United States the money in circulation is only about half of the 
money in the country, and the deposits subject to check are likewise about 
half, so that the true ratio, 4.7, of M' to M, turns out to be exactly the same 
as the ratio of deposits to money in the country as calculated by the rough 
method used in the table. 

" See "La vitesse de la circulation," in Journal de la SocUte de Statistique 
de Paris, April 1895, p. 148, and The Purchasing Power of Money, p. 87. 



20 

of checks is increasing faster than the deposits against which they 
are drawn, which means that the activity of these deposits is in- 
creasing. It is true that this is not definitely indicated by the 
figures for all countries ; but, judging from the facts in the United 
States, it is probable that the raw figures for the growth of de- 
posits overstate the rate of growth of deposits subject to check, 
while those for clearings understate the rate of growth of the use 
of checks. 

T. Finally we come to the volume of trade. This is the one 
factor which acts to restrain the rise of prices. Doubtless the 
volume of trade will continue to increase in the future, but there 
seems to be no evidence to lead to the conclusion that it will in- 
crease at a more rapid rate in the future than at the present time ; 
and no evidence that it will, as long as the present development 
of banking continues, outstrip the expansion of media of exchange. 
On the contrary, there is some reason to believe that trade, while 
it will continue to expand, will expand more slowly. The fuller 
occupation of our lands and the decrease in the rate of growth of 
our population, which is partly a consequence of this occupation 
and partly a consequence of the voluntary decrease in the birth- 
rate, should tend to curb the rate of increase. Certain inventions 
pertaining to transportation will doubtless cause long distance and 
international trade to increase greatly, but such trade constitutes 
only the outer fringe of the great mass of trade. For the United 
States, for instance, the whole foreign trade is less than one per 
cent of the internal trade. The great bulk of trade consists of 
local transactions. Local trade is aflTected by transportation but 
not aff'ected so greatly as long distance trade. Thus rapid trans- 
portation has caused a prodigious increase in the trade between 
the antipodes, a less increase in the trade between the states of 
the United States and a still less increase in the trade between 
individuals in the same town. Improvements in transportation 
always help trade, but the connection between transportation and 
trade is a loose one so that probably the growth of transportation 
always outstrips the growth of trade. 

After a careful weighing of all the evidence available I have been 
unable to escape the conclusion that, in the race between MV -\- 
M'V, the purchasing power of both money and deposits, on the 
one hand, and T, the volume of trade, on the other, the outlook is 
that the former will continue for many years to outstrip the latter. 




-\ 



oq 



(TQ 




cr ^ 



r* W_ 



H: « 



OP 



< i- 



22 

If this conclusion is correct, then prices must, on the average,, 
continue to rise. 

In all the above discussion we have considered only the rates of 
increase of these factors, and not their absolute magnitudes. As 
has been indicated, this was done because as yet data are lacking 
by which to make any reliable estimate for the various magnitudes 
in the world's equation of exchange. In order, however, to provide 
some sort of mental picture of the changes in the various magni- 
tudes, the accompanying illustrative table and diagram are given. ^^ 
The figure used for M in 1911 is probably approximately correct 
and that for M' correct within a few billions of dollars. The 
figures for V and V are simply the figures for the velocities of 
circulation in the United States. That they are representative of 
the world at large is not and could not be claimed. We know noth- 
ing of the absolute magnitude of these factors in the world as 
a whole. 

Assuming these hypothetical values for the six magnitudes in 
the world equation of exchange for 1911, we can picture what 
their values will grow to in fifteen years under the two hypotheses 
represented as "probable" and "conservative." The "probable" 
hypothesis indicates what will happen if all the factors grow, as 
recent experience and present prospects indicate to be most prob- 
able. The "conservative" hypothesis indicates what will happen if 
the growth of the four price-raising factors, M, M/, V, V\ is as slow 
as could reasonably be assumed, while, at the same time, the growth 
of the one price-restraining factor, T, is as rapid as could reason- 
ably be assumed. 

The rates selected for the "probable" case are those indicated by 
recent experience except (1) that the rate for M is reduced from 
214 to 2 to provide for the probable gradual falling off in the 
rate of increase of money and (2) that, as a consequence of this 
reduction in M, there will be an equal reduction in M' from 6Y2 to 
6. It will be seen, therefore, that, although I have called these 
figures "probable" as distinguished from the others which are 
called "conservative," the former might perhaps be called con- 
servative and the latter, ultra-conservative. The conservative 
character of the "probable" estimates is illustrated by the figures 
for deposits. The rate of growth of bank deposits which is called 

" The diagram is constructed on the same princijiles as those in the June 
article and The Purchasing Power of Money. 



23 



"probable" is less than the rate (7.3) in the United States. This is 
due chiefly to the low rate (3 per cent) in England. But before 
fifteen years are up "Continental Europe and Japan" will cut 
so large a figure in the average that the low rate in England will 
have less weight and the high rates of Germany and other coun- 
tries, now relatively insignificant in their volume of deposits, will 
have more weight. The result may well be that the world's average 
rate of increase of deposits will be greater in the future even if 
the rates in some or all individual countries should become less. 

HYPOTHETICAL, FIGURES ILLUSTRATING FUTURE GROWTH 
(figures foe the absolute size of m, m', and t are in billions of dollars) 





O o 

M 


M' 


M 

> 

V 


11 
v 




o 

> 

T 


MV 


C C! 0) 

M'V 


MV-i-M- V 


03 O 

31' 
M 


Relative 
g money 
<) expendi- 
tures^ 




MV+M-V 


Assumed for 1911 


13 


15 


21 


50 


1.00 


1000 
4J4 


250 


750 


1000 


Wa 


25 


Future fProbablei 
rates of J 


3 


6 


% 


1% 


2 












growth 1 Conserva- 
i. tive'^ 


1/2 


5 





1 





5 












Results fProbablei 
in 15 J 


16 


36 


23 


62 


1.34 


1940 


870 


2230 


2600 


2^ 


14 


years 1 Conserva- 
l. tive' 


15 


31 


21 


58 


1.02 


2080 


315 


3800 


2115 


2 


15 



* By "probable" is meant : "In case all five price-determining factors grow 
as recent experience and present prospects indicate to be most probable." 

^ By "conservative" is meant: "In case all price-raising factors (M, M', V, 
V) grow as slowly as could reasonably be assumed and the price-restraining 
factor (T) grows as fast as could reasonably be assumed." 

' Relatively to money in circulation. 

* As percentage of total expenditures. 

The rates selected for the "conservative" case are for M, V and 
F' reduced by half a point from those of the "probable" case, that 
for M' reduced one point (i.e., reduced half a point because of the 
reduction of a half point in the M rate and another half a point 
on its own account) and that for T raised half a point. 

The "probable" figures illustrate, what has already been implied, 
that the outlook is for a rise of prices of 2 per cent per annum or 
from an assumed 100 per cent in 1911 to 134 per cent in 1926, 
i.e. a rise of one third in the next fifteen years, Avhile on the most 



24 

conservative basis the price level will not fall. Humanly speaking, 
I believe it is certain that prices will not show a downward trend 
in the next fifteen years. There seems to me to be less than an 
even chance that any one of the five factors should be as extreme 
as supposed in the "conservative" case. Much less is it likely 
that they all should be. But even if there were an even chance 
(i.e., a chance of 1/2 ) that each of these factors, taken by itself, 
should deviate from the "probable" as much as indicated in the 
"conservative" case, the chance that all five should do so at the 
same time would be extremely small, viz., (^2)^ or one chance in 
32. The true chance is probably considerably less than this. On 
the basis of the theory of probability, I am inclined to believe that 
the chance that prices will not, in general, rise during the next 
fifteen years is less than one in one hundred. ^^ 

"The reasons why the chance is so small are three. First and foremost 
is the fact above mentioned that among the five variables affecting the price 
level, the chance of a conspiracy, so to speak, among them so that they shall 
all work in the same direction at the same time is extremely small. One may 
"trust to luck" that if some one price-raising factor such as M should through 
a sudden cessation of gold mining be greatly slackened, some one or more of 
the other four factors are almost sure to work a partial or complete com- 
pensation. This will not be mysterious to anyone familiar with the theory of 
chances. It is well known that in tossing five coins the chance of all five 
coming up heads is only one in thirty-two. 

The second reason is that the steadiness in growth of the various factors 
in the past makes it extremely improbable that the variation in any one, or 
at any rate, any considerable number of them, will be very great. The third 
is the increasing dominance of checks as compared with money which of 
itself might, paradoxically, cause a rise of prices even though, individually, 
both the rates of growth of money and of deposits subject to check should 
happen to fall. 

It is possible on the theory of probabilities and certain assumptions to 
calculate the chances that the five magnitudes determining the price level 
may change in such a manner as to prevent a rise in prices. This calculation 
is more complicated than the mere raising of a fraction to a power as sup- 
posed above. It must take account of all combinations of chances which 
might produce the result under discussion. These include the chances that 
a deviation in one or more elements may be so great as not to require the 
aid of all or even of any of the other elements. To perform this calculation 
we make two assumptions, (1) that the ordinary law of probability or 
frequency applies to the present case, and (2) that the "probable deviation" 
is in all cases V2 o^ ^ point in the tables. The first supposition seems ad- 
missible, and even if it should not exactly apply, the result would not be 
materially affected. The second supposition — that the probable deviation is 
1/2 — is of course merely a matter of opinion; but it greatly overstates, in my 



25 

The table illustrates clearly how the increasing dominance of 
deposit currency will tend to push prices upward even if the 
growth in the volume of money should diminish by %, i.e., by 20 
per cent, and this in spite of the reduction of 1/^ in the rate of 
growth of deposits which would follow from the reduction of that 
amount in the growth of money. In other words, in spite of the fact 
that the figures both for M and for ~. are assumed to be ^ a point 

lower in the future than in the past, the resulting rise of prices is 
the same in the future as in the past, owing simply to the increas- 
ing dominance of M^ in controlling the result. This increasing 

importance of M' is illustrated by the increase in j^ which is 
represented as changing in the next 15 years from a supposed 

opinion, the liability to fluctuation and therefore strengthens the conclusions 
which follow. By "probable deviation" in this case is, of course, meant the 
probable change of rates of growth from their present figures to those of the 
next fifteen years. To say, for instance, that the probable deviation of M 
is 1/2 means: "It is as likely as not that the annual rate of growth of M in the 
next fifteen years will vary from that recently experienced by i/g." This implies, 
for instance, that as likely as not the average rate of new gold coinage com- 
bined with other additions to the world's stock of money in the next fifteen 
years will be 20 per cent greater or less than it is now. We have no good 
statistics by which to test these purely conjectural figures. As already noted, 
the annual output of gold during recent years has maintained a remarkably 
steady relation to the estimated stock of gold in the world. If we take the 
various available estimates of the total money in the world (in the years 1860, 
1883, 1890, 1896, 1910) and compare with them the average annual yearly pro- 
duction of gold in the few years immediately preceding and succeeding these 
dates, we find that the gold production amounted in these respective years 
to approximately 3 per cent, I14 per cent, 1 per cent, 2 per cent and Sy, per 
cent. The "probable deviation" of any one of these figures from the mean 
is by the usual formula, about .6. The variability as between immediately 
successive periods of fifteen years each would be presumably less. For bank 
deposits no uniform series of statistics are available for a long series of years. 
The best we can do is to take the "individual deposits" in the United States 
for the last 15 years and the 15 years immediately preceding and to com- 
pare them with the increase in money in circulation outside of banks and 
United States government vaults. In this way it is found that the annual 
rate of increase of deposits relatively to money is exactly 3 per cent in both 
periods. (The money increased 1 per cent per annum in the first period and 
81/2 per cent in the second; while absolute deposits increased 4 per cent and 
lli/o per cent respectively.) For the volume of trade we likewise have no 
extended and uniform figures to indicate variability. We only have the 
rough calculation of Professor Kemmerer beginning in 1879 and extending 



26 

134: to a supposed 2^. The last column shows substantially the 
same tendency in a different form. The relative use of money is 
represented as declining from a supposed 25 per cent to 15 per 
cent of the total use of circulating media. Even this reduced 
ratio, 15 per cent, would still be double the present ratio in the 
United States. 

In view of all the facts, it would not seem strange if the rise in 
prices should continue in the future for at least a generation. This 
does not mean, of course, that a rise will occur in every individual 
year. On the contrary, the upward movement, for reasons else- 
where given, ^® is likely to be interrupted every decade or so by a 
crisis, like that of 1907. As stated in last year's article, such a 
crisis seems likely to incubate in a few years from the present. It 
is true that recent liquidations due to business men retrenching 
(through fear of a drastic enforcement of the Sherman law, etc., 
and because of the temporary recession of prices) have nearly re- 
stored normal conditions in the United States. But this liquida- 
tion has postponed rather than averted the expected crisis, and 
is, moreover, confined to the United States. In Canada and Ger- 
many we hear of a distended condition of credit. A restoration of 

to 1908. This lacks only one year of making two periods of fifteen years each. 
Dividing this period into two equal parts we find the rate of growth of trade 
in the United States on the basis of these figures is 41/3 per cent per annum 
in the first period and 5 per cent in the second. (See his Money and Prices, p. 
131.) These stray straws indicate, although far from conclusively, that the 
assumption of half a point more or less as the "probable deviation" is con- 
servative rather than excessive for the world's growth of money and de- 
posits. As to their velocities I feel reasonably certain, on the basis of the 
considerations already given, that their rate of increase will not appreciably 
slacken. 

The result of the calculations is: the chances that tlie trend of prices for 
the next fifteen years will not be upward are less than one in one hundred. 
The correctness of this conclusion does not depend on any assumption of ac- 
curacy in the rates of groM'th used in the table. Even if the true rate of 
growth of M should be something different from the estimate here made, the 
same reasoning would apply. Whatever is the true rate of growth, that rate 
must fall by y, in order to affect the price level by 1/2 and the same applies to 
T, etc. The correctness of the conclusion does depend, however, on the as- 
sumption that the "probable deviations" used are conservative. Even if 
statistical research should prove that they are not always conservative, never- 
theless any other reasonable assumption could still show that the chance of a 
fall in price is very slight indeed. 

" The Purchasing Power of Money, ch. 4. 



27 

the steady upward movement in prices is pretty sure to mean a 
boom, and a boom is the incubation period for a crisis. 

No upper limit is assigned to the possible rate of rise of prices, 
for the reason that we can never know when new and rich mines will 
be discovered or when someone will find a paying method of ex- 
tracting gold from the Southern clays or even from sea water. 

We conclude then that prices are almost sure to continue to 
rise in the next decade or two, probably as fast on the average as 
S per cent per annum. 

It is interesting to observe that the United States now has the 
dominant role in the world drama which these statistics aim to 
picture. This is especially true in respect to deposits subject to 
check. We know that the total individual deposits in the United 
States are sixteen billions, and those subject to check are eight 
billions. In all other countries the total deposits reported are 
only about thirteen billions. If it be true that, in these countries 
also, the deposits subject to check constitute about half of the 
total deposits, there are as yet among these other nations only 
about six and one half billions of deposits subject to check. The 
fact that the United States deposits loom up as so large a part 
of the world's deposits need not surprise us when we realize how 
much higher the American price level is than that of other and 
especially oriental countries and how much more money we have 
per capita. India, for instance, with its teeming millions, has 
only 67 cents per capita, while the United States has $35 of which 
about half is in actual circulation. In addition we have a per 
capita of $150 of deposits subject to check. The fact that prices 
in the United States and Canada have risen more rapidly than 
elsewhere is, in my opinion, chiefly due to the rapid rate at which 
deposits in these countries have increased. 

As was indicated in the June article, the unequal advances in 
prices in different countries will, in general, tend toward mutual 
correction. This will imply changes in international trade. The 
relatively slight rise in England tends to make England attractive 
to purchasers and unattractive to sellers. The opposite is true 
of the United States, Canada and Germany. We may therefore 
expect in the immediate future a great stimulus to British export 
trade (and to the import of gold), retardation in import trade 
(and in export of gold) and opposite tendencies in the trade of 
the United States, Canada and Germany. But these adjustments 



28 

may be irregular owing to the fact that international trade is so 
sensitive to the special market conditions of the limited number of 
articles entering into it as well as to other circumstances. What- 
ever the mutual adjustments of price levels between countries by 
international trade and the redistribution of the stocks of gold, I 
believe the world as a whole is destined to see for many years to 
come a rapidly rising tide of prices. 

Irving Fisher. 
Yale University. 



\ 



LIBRARY OF CONGRESS 



013 716 009 2 



